What is Risk Averse? Someone who is risk averse has the characteristic or trait of preferring avoiding loss over making a gain. This characteristic is usually attached to investors or market participants who prefer investments with lower returns and relatively known risks over investments with potentially higher returns but also with higher uncertainty and more…
What is a Negative Correlation? A negative correlation is a relationship between two variables that move in opposite directions. In other words, when variable A increases, variable B decreases. A negative correlation is also known as an inverse correlation. Two variables can have varying strengths of negative correlation. The variable A could be strongly negatively…
What is LTM (Last Twelve Months)? LTM (Last Twelve Months), also sometimes known as the trailing or rolling twelve months, is a time frame frequently used in connection with financial ratios, such as revenues or return on equity (ROE), to evaluate a company’s performance during the immediately preceding 12-month time period. This is not necessarily related…
What is the One-Period Dividend Discount Model (DDM)? The one-period dividend discount model is a variation of the dividend discount model. The one-period dividend discount variation is used to determine the intrinsic value of a stock that is planned to be held for one period only (usually one year). Similar to the general dividend discount…
What is Direct Security? Direct security is typically collateral that can be used to secure a loan. Securities can be broadly divided into two distinct types: asset securities and collateral securities. Asset security represents ownership interest held by shareholders in an enterprise, realized in the form of shares of capital stock. Holders of equity securities…
What is Duration Drift? Duration drift represents the change in duration as a result of the passage of time. It is a problem in asset-liability management, which makes it necessary to regularly monitor and recalculate the duration of a financial instrument. To better understand duration drift and its effects, you need to first understand what…
What is a General Security Agreement (GSA)? A General Security Agreement (GSA) grants a security interest over personal property or assets, the collateral pledged for many types of financing. The contract is executed by a debtor (borrower) in favor of a creditor (lender). A GSA can support various lender obligations, including personal and commercial loans….
What is the Quality of Equipment? Evaluating the quality of equipment as collateral for a loan plays an important role in the credit analysis process, as it determines the potential amount of money to be paid for an asset pledged as collateral. In the event a borrower goes bankrupt, a lender can repossess the collateral…
What are the Types of Security? There are four main types of security: debt securities, equity securities, derivative securities, and hybrid securities, which are a combination of debt and equity. Let’s first define security. Security relates to a financial instrument or financial asset that can be traded in the open market, e.g., a stock, bond,…
What is the Volcker Rule? The Volcker Rule refers to Sec 619 of the Dodd-Frank Act, which prohibits banks from engaging in proprietary trading, or from using their depositors’ funds to invest in risky investment instruments. The rule also prohibits banks from owning or investing in hedge funds or private equity funds. Before the 2008 financial…
